Thursday, January 10, 2008

Fed Cut – Impact on Savers

Today, the Fed signaled it intending to continue to push interest rates down in hopes of stimulating the economy. If it follows through with its plan, we need to have a plan in place for dealing with the change.

1. If you are looking to pay off loans in some sort of debt reduction plan, you need to consider reallocating principal payments.

Example: If you have a $10,000 car loan at a fixed 5.9% and a $12,000 car loan a variable 6.5%, I would recommend moving all extra payments towards the fixed rate loan. Although it is currently the “high cost loan,” it will not be for long.

2. Lower minimum monthly payments. Student loans, HELOCS, and credit card interest rates key off LIBOR or other variable interest rates. As the Fed continues to act, we should expect a falling LIBOR and take appropriate action. Even if youcannot increase payments, you still win as each payment includes more “principal” every month.

3. If you have a student loan, DO NOT CONSOLIDATE in the next few months. Once you consolidate, you are stuck with the rates in place at that time. Since rates are going to fall, wait at least a few months to take advantage of a great opportunity.

Savings: Interest rates on everything from savings accounts to bonds will fall. Depending upon your situation, you may want to move money from variable rate products like savings accounts to fixed rate vehicles like Certificates of Deposits.

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